Telecoms Are Calling Investors

THE PRIVATE EQUITY BUYOUT of telecommunications company
Alltel
announced over the weekend was the cherry on the top of a very quiet bull market in the telecommunications sector.

But those with a long-term view have seen something that makes this deal par for the course -- major breakouts from multi-year patterns. With or without new deals, telecoms stocks are looking pretty good.

Flying well below the radar, the American Stock Exchange North American telecommunications index has gained an eye-popping 261% since October 2002 vs. a 99% gain for the Standard & Poor's 500 (see chart 1). But that kind of superior performance must be put into perspective. The index lost over 80% of its value in the bear market compared to the S&P's 50% haircut.

Chart 1

One look at the index does show it to be in an accelerated trend. S buying it now does risk the possibility of a sharp corrective decline. But any index is a mathematical concoction of its component components and some of these stocks are in healthy shape.

Earlier this month, sector heavyweight
Verizon Communications
broke out from an eight-month technical range on beefy volume (see Chart 2). What makes this a more significant long-term event was that it finally confirmed last year's breakout through its bear market trendline.

Chart 2

While Verizon's private bear market ended in 2002 with the rest of the market, it traded in a huge price range for the following few years. Money continued to flow out from the stock until that money trend was reversed in October 2005 so one could argue that Verizon's bull market began at that time. Under this scenario, Verizon's rally is still young compared to that of the broad market.

The opportunities are not limited to traditional land-based companies. Wireless communications company
Sprint Nextel,
in sympathy to the Alltel deal, jumped through the top of a trading range that had been in effect since the stock collapsed last July on a growth and revenue miss (see Chart 3).

Chart 3

Using a technical measuring technique, the height of the trading range is projected up from the breakout point to yield a minimum target of 25. That would put the stock back at its post-bear market highs set in 2005-2006, albeit still well below its 1999 peak of near 75.

Telecoms infrastructure and equipment maker
Dycom Industries
broke out from a two-year trading range in February (see Chart 4). It spent most of April and May easing lower before rallying again May 18 to confirm the long-term breakout. And Dycom is not alone in this subsector as
MasTec
is in very similar shape.

Chart 4

Wireless equipment maker
Motorola
may have been lagging its peers
Nokia
and
Ericsson
but it now shows an abrupt positive shift in buying interest and a short-term trendline breakout (see Chart 5).

Chart 5

The stock fell hard in March to break a long-term support level but rather than collapsing it began to trade sideways in a range. Money began to flow back into the stock later that month and with last week's rally it has broken through the top of that range. Failures of bearish technical signals often become bullish signals and Motorola appears to be proving that belief.

The bottom line is that the telecommunications sector, including landline, wireless and equipment, has been quietly strong for several years. Its rising tide has been lifting all boats within. But many that have lagged are now showing signs that they are ready to play catch up.

Also read Getting Technical:

The Markets' Mood this Wednesday in Barron's Online.

Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn writes the daily "Quick Takes Pro" newsletter (you can get a free trial at www.quicktakespro.com). He is the author of two books on technical analysis, most recently Technical Analysis: Plain and Simple, and was Chief Technical Analyst for BridgeNews. He also is on the Board of Directors of the Market Technicians Association (www.mta.org).

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